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UK pensions update - March 2015

Pensions Update March 2015 In this issue Budget 2014: Pensions aspects IBM vs Dalgliesh - Judgment published High Court decision in MNRPF vs Stena Line Ltd. and others Pension Schemes Act 2015 receives Royal Assent Finance Act 2004 (as amended by the Taxation of Pensions Act 2014) - secondary legislation finalised Regulator publishes draft essential guide to communicating with members about pension flexibilities Automatic Enrolment - Government Response to Consultation Code of Practice and updated guidance for combating pension liberation scams published Revaluation Orders laid before Parliament Abolition of DB contracting out - new Regulations and Response to Consultation published Abolition of DB contracting out - reminder: GMP reconciliation Abolition of DB contracting out - Countdown Bulletin No. 7 published Abolition of DB contracting out - PMI News article published FCA publish letter for CEOs regarding requirement to establish published DWP consults on proposed changes to the Investment Regulations Consultation on DC Governance and Charges - last-minute changes to secondary legislation Clarification of the PPF Levy Determination announced Extension of EMIR exemption from clearing for pension schemes This newsletter is for information purposes only. Its contents do not constitute legal advice and should not be regarded as a Budget 2014: Pensions aspects The Budget delivered by the Chancellor, George Osborne, on 18 March includes several important pensions measures: extension of pensions freedoms to annuities - these changes aim, by April 2016, to give those with existing annuities greater flexibility, in line with those who will be taking their pensions flexibly after April 2015. The main reforms will be to change the tax treatment of those wishing to assign annuities to remove the "unauthorised payment" charge, and instead to tax any lump sum a person receives in exchange for an assigned annuity at the person's marginal tax rate. The Government states that it will work with the Financial Conduct Authority ("FCA") to ensure appropriate consumer protection is in place, and has published a call for evidence relating to a consultation on creating a secondary annuity market. The call for evidence can be found by clicking here. Lifetime Allowance for pension benefits - the lifetime allowance will be reduced from £1.25 million to £1 million from 6 April 2016. Transitional protection for pension rights already over £1 million will be introduced alongside this reduction to ensure the change is not retrospective. The lifetime allowance will be indexed annually in line with CPI from 6 April 2018 onwards; income tax exemption for advice funded by employer on DB to DC transfers - with effect from 6 April 2015, a new income tax exemption is introduced for employees and former employees where employers are mandated to provide appropriate independent advice as part of any employer-led transfer exercise from defined benefit (DB) to defined contribution (DC) pension schemes. The details can be found by clicking here. > Back to Top IBM vs Dalgliesh - Judgment published As reported in last month's update, the High Court has ruled on the remedies available to members in the case of IBM United Kingdom Holdings Limited v Dalgleish (the "Remedies Judgment"). This follows the judgment handed down in April 2014, which established that IBM had breached its implied duty of good faith and its contractual duty of trust and confidence in relation to the actions which it took in order to close its DB schemes to further accrual (the "Liability Judgment") The background to the changes which were implemented by IBM and the key points arising from the Liability Judgement are covered in our April Update. The upshot of the Liabilities Judgement is that the majority of the changes which were made by IBM in breach of its duties may now be unwound. substitute for detailed advice in individual cases. If you wish to discuss any of these issues further, please contact your usual Baker & McKenzie lawyer. Jeanette Holland jeanette.holland@bakermckenzie.com Robert West robert.west@bakermckenzie.com Chantal Thompson chantal.thompson@bakermckenzie.com Arron Slocombe arron.slocombe@bakermckenzie.com Key points to note include: Non - pensionability agreements ("NPAs"): based on the particular facts and background to the case, IBM's procurement of, and entering into NPA's amounted to a breach of its contractual duty of trust and confidence. The NPAs at issue were issued in various forms at various points between 2009- 2011 but all provided that future salary increases (some of a limited period, some of an unlimited period) would not be pensionable for DB purposes. The Court ruled that, based on the particular facts in this case, members who had entered into non-pensionability agreements could elect to keep all salary increases (both prospectively and back to 2009 - the date of the first round of NPAs) and that these would be 2/3 pensionable (the reason why a 2/3 cap was applied in this particular case rather than the full amount was because there had been an earlier pensionability agreements in 2006). This aspect of the Remedies Judgment highlights the need for care by employers when seeking to implement NPAs. It does not, however, mean that NPAs will always be a breach of an employer's contractual duty: the particular factual background and form of the NPAs will need to be carefully considered in each case and legal advice sought. Exclusion notices: notices which were issued by IBM in an attempt to exclude active members from the DB plans (based on a particular power in the schemes' governing documentation) and therefore terminate future accrual, amounted to a breach of both its contractual duty of trust and confidence and its implied duty of good faith, and, as such, could be set aside at the option of members. Although the manner in which IBM exercised its power under the Rules meant that IBM was in breach of its duties of good faith and its contractual duty of trust and confidence, the Court did not go as far as saying that the power itself could not be exercised. IBM could still potentially issue new exclusion notices provided that it conducts a further, untainted, consultation process. Failure to consult: IBM's failure to consult properly in relation to changes amounted to a breach of the Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006 (the "Pension Consultation Regulations"). A breach of the Pension Consultation Regulations alone does not give members the right to any monetary remedy. In addition, however, the Court ruled that IBM's failure to consult also amounted to a breach of a separate contractual duty, in relation to which members could, in principle, bring a separate claim for contractual damages. Whilst claims by members for contractual damages in respect of a failure to consult may be unlikely in this particular case (as members may be unlikely to be able to show loss in view of the other remedies awarded) the fact that the Court confirmed that such a remedy is available, is likely to be taken into account as an additional risk factor when employers are considering their approach to consultation exercises more generally. IBM is expected to appeal the Liabilities Judgment. The full text of the judgment can be found by clicking here. > Back to Top High Court decision in MNRPF vs Stena Line Ltd. and others The High Court has handed down its judgment in the MNRPF case (Merchant Navy Ratings Pension Fund Trustees Limited v Stena Line Limited and others [2015] EWHC 448 (Ch)), a decision which will be of interest to both trustees and employers. The case concerned the Merchant Navy Ratings Pension Fund (the "MNRPF"), a non-sectionalised industry-wide defined benefit occupational pension scheme, which was closed to future accrual in 2001. The Trustee of the MNRPF applied to the Court for approval of a complex new contribution regime under which all participating employers (rather than a more limited group of participating employers who employed active members or persons eligible to join the MNRPF in 1999 ("Current Employers")) may be made liable to make contributions to repair the current deficit. In proposing the new regime, the Trustee was particularly concerned to reduce the amount of cross-subsidy within the MNRPF: under the existing contribution regime, Current Employers bore 100% of the deficit repair obligations despite the fact that only 32.5% of scheme liabilities were attributable to the employment of members by Current Employers. The Court was also asked to determine a number of questions which arose as to the status of the MNRPF under Section 75 of the Pension Act 1995 (the legislation which requires employers to pay a debt calculated on the buy-out basis in certain circumstances). These questions arose because, under the MNRPF Rules, certain members remained entitled to revaluation of their benefits at a higher rate so long as they continued to be employed by a Current Employer ("enhanced revaluation"). Much of the lengthy decision relates specifically to the circumstances of the MNRPF. However, two aspects of the decision are likely to be of more general interest: in relation to the question of whether it would be proper for the Trustee to introduce a new regime under which all participating employers are liable to fund the MNRPF, the Court held that, as long as the primary purpose of securing the benefits due under the Rules is furthered and the employer covenant is sufficiently strong to fulfil that purpose, it is reasonable and proper, should the Trustee consider it appropriate to do so, to take into account the employers' interests, both when determining whether to widen the pool of those liable to contribute and when considering whether to seek to reduce the element of cross-subsidy. This aspect of the decision emphasises that it may be appropriate for trustees to take into account employers' interests, for example in the context of funding discussions, so long as member security is not prejudiced; and in relation to the question of whether the MNRPF was a frozen scheme for Section 75 purposes despite the enhanced revaluation, the Court held that it was. This means that Current Employers who remained statutory employers immediately before the closure of the MNRPF to future accrual in 2001 potentially remain liable for a Section 75 debt whether or not they subsequently cease to employ members entitled to enhanced revaluation (and ceasing to employ such members will not of itself trigger a Section 75 debt). This aspect of the decision may be relevant to schemes which retain a final salary link (or some other form of enhanced benefit for current employees) following a scheme closure. The decision suggests that, in such cases, a Section 75 debt will not be triggered by ceasing to employ "active deferreds" (that is, members with a final salary link or other enhanced benefit) while they remain in employment with the employer, but employers will remain potentially liable for a Section 75 debt on insolvency or on a scheme winding-up, while they remain in employment with the employer. The full text of the judgment can be found by clicking here. The IBM and MNRPF cases will be discussed at our Breakfast Briefing on 28 April. > Back to Top Pension Schemes Act 2015 receives Royal Assent The Pension Schemes Act 2015 received Royal Assent on 3 March 2015. As reported in our February 2015 Update, four sets of Regulations have been prepared, and have now been laid before Parliament, coming into force on 6 April 2015: The Occupational Pension Schemes (Consequential and Miscellaneous Amendments) Regulations 2015, which can be found by clicking here; The Occupational and Personal Pension Schemes (Transfer Values) (Amendment and Revocation) Regulations 2015, which can be found by clicking here; The Occupational and Personal Pension Schemes (Disclosure of Information) (Amendment) Regulations 2015, which can be found by clicking here; and The Pension Schemes Act 2015 (Transitional Provisions and Appropriate Independent Advice) Regulations 2015, which can be found by clicking here. These Regulations are aimed at ensuring that the new pension flexibilities operate as the Government intends, that the transfer process operates properly, that trustees give scheme members appropriate information, and that trustees ensure that, where relevant, members have taken appropriate advice before exchanging 'safeguarded benefits' (essentially DB benefits) for flexible benefits, either by transferring out of the scheme, or by conversion of benefits within the scheme. In relation to this last requirement, the Regulations include an exemption where the value of such benefits is £30,000 or less. > Back to Top Finance Act 2004 (as amended by the Taxation of Pensions Act 2014) - secondary legislation finalised As part of the changes made under the Taxation of Pensions Act 2014, three sets of Regulations have The Registered Pension Schemes (Provision of Information) (Amendment) Regulations 2015, which can be found by clicking here; The Overseas Pension Schemes (Miscellaneous Amendments) Regulations 2015, which can be found by clicking here; and The Registered Pension Schemes (Transfer of Sums and Assets)(Amendment) Regulations 2015, which can be found by clicking here. The first set of Regulations will be particularly significant for trustees, as they amend the Registered Pension Schemes (Provision of Information) Regulations 2006, and place new requirements on trustees to provide information to members where the members first access their benefits flexibly. The information includes confirmation of the date the member flexibly accessed their benefits, an explanation that the member's annual allowance for pension inputs to money purchase arrangements will change to £10,000, and that the member must within 91 days tell the administrators of all the pension schemes in which they are accruing benefits or to which they contribute. > Back to Top Regulator publishes draft essential guide to communicating with members about pension flexibilities As part of the process of implementation of the new DC pension flexibilities, the Pensions Regulator has prepared a draft guide for trustees on communicating with members.Where members are seeking to access their benefits flexibly on or after 6 April 2015, trustees are required to signpost members to the Government's free service, Pension Wise, which will be available to help members to understand the choices available to them.The draft guide provides information on the key changes to the disclosure regulations governing communications with members and good practice suggestions for communications from trustees to members regarding their retirement choices. The draft guide was prepared based on draft legislation, so may in future be amended to reflect the final version of the Occupational and Personal Pension Schemes (Disclosure of Information) (Amendment) Regulations 2015, which have now been laid before Parliament. The guide, once finalised, will be particularly relevant for trustees of DC schemes, or hybrid schemes containing DC arrangements (including DC AVCs), in relation to which the new flexibilities will apply. The draft guide can be found by clicking here. > Back to Top Automatic Enrolment - Government Response to Consultation As reported in our January 2015 Update, the Government has consulted on the draft version of the Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2015, and has now issued its response.The draft Regulations on which the consultation was based proposed changes which were aimed at simplifying automatic enrolment and reducing burdens on employers.The three main changes will be: the introduction of an alternative quality requirement for defined benefits schemes - this new quality requirement will be available for defined benefit schemes to use to qualify as automatic enrolment schemes. It is potentially helpful for schemes which currently qualify on the basis that they meet the requirements for contracted-out schemes, but will no longer be able to do so when contracting out is ended in April 2016. The alternative quality requirement will involve a "cost of accruals" test, under which the cost of future accruals in the scheme must require contributions of a certain percentage of each member's earnings. If a scheme uses the alternative quality requirement, it will not need to meet the Test Scheme Standard (which is the test which at present applies for non-contracted out schemes). simplification of the information requirements for employers - under current requirements employers must give five different pieces of information to different types of workers regarding their position for automatic enrolment purposes. These requirements have proven difficult for employers to administer, so the amendments are intended to reduce the obligations of employers, and streamline the quantity and content of communications with workers. Employers will still have the option to continue to comply with the current requirements. creation of exceptions to employer duties in certain circumstances - exemptions to the duty to enrol employees automatically will apply in certain circumstances, including where an employee is in a notice period, where an employee has cancelled membership of a qualifying scheme, where an employee has tax protected status which could be jeopardised by further accrual of pension, and where an employee has received a winding-up lump sum. As a result of the consultation, a number of technical changes have been made to the draft Regulations, and the Regulations have now been finalised.The final version can be viewed by clicking here. The consultation response document can be found by clicking here. > Back to Top Code of Practice and updated guidance for combating pension liberation scams published The Pension Liberation Industry Group, involving the NAPF and other participants in the industry, has published a voluntary code of good practice to assist trustees and administrators when dealing with transfer requests.The code is effective from 16 March 2015 and can be used for any transfers processed after that date, even if the request was received prior to it.The code sets out three core principles to protect members, stating that trustees, providers and administrators should: raise awareness of pension scams for members and beneficiaries of their scheme; have robust, but proportionate, processes for assessing whether a receiving scheme may be operating as part of a pension scam, and for responding to that risk; and generally be aware of the known current strategies of the perpetrators of pension scams in order to inform the due diligence they need to undertake and refer to the warning flags as indicated in the Pensions Regulator's guidance, FCA alerts and Action Fraud. The code should prove to be a useful tool for trustees when investigating transfer requests, as it sets out a "Pensions Scam Due Diligence Process" for investigating pension transfer requests, including example letters to members. The code can be found by clicking here. In addition, the Pensions Regulator has updated its "Scorpion" campaign aimed at raising awareness of pensions liberation and other scams among scheme members and trustees, in light of the new pension flexibilities which will be available from April 2015. The revised scorpion campaign materials can be found by clicking here. > Back to Top Revaluation Orders laid before Parliament Two orders, the Social Security Revaluation of Earnings Factors Order 2015, and the Guaranteed Minimum Pensions Increase Order 2015, have been laid before Parliament, and will come into force on 6 April 2015. The first provides for increases in the earnings factors to be used for the calculation of the level of revaluation of additional pensions or guaranteed minimum pensions under Part 3 of the Pension Schemes Act 1993. The second specifies that the part of a guaranteed minimum pension, payable by a contracted-out DB scheme, which is attributable to earnings factors for the tax years 1988-89 to 1996-97, is to be increased by 1.2%. The Social Security Revaluation of Earnings Factors Order 2015 can be found by clicking here, and the Guaranteed Minimum Pensions Increase Order 2015 can be found by clicking here. > Back to Top Abolition of DB contracting out - new Regulations and Response to Consultation published Under the Pensions Act 2014, employers have a statutory power to amend their schemes, without the need for trustee consent, to mitigate against the loss of the contracted-out rebate and the resulting increase in the National Insurance contributions.Amendments could take the form of an alteration to a member's future accrual rate, or an increase in the rate of employee contributions, or both (the extent of such changes is limited by reference to the increase in National Insurance contributions).An actuarial certification is, however, required where an amendment is made to the scheme rules. The DWP consulted last year on the content of the regulations to be made under the Pensions Act 2014 relating to the ending of contracting-out, and has now published its response to the consultation.The consultation covered two sets of regulations: The Occupational Pension Schemes (Power to Amend Schemes to Reflect Abolition of Contracting-out) Regulations 2015, which have now been made and laid before Parliament, and will come into force on 6 April 2015. The regulations set out the requirements which must be met in order for employers to amend their schemes using the statutory power, and the method which the actuary must use to calculate and certify that the value of the amendments is no greater than the increase in National Insurance contributions; and The Occupational Pension Schemes (Schemes that were Contracted out) Regulations, which have not yet been finalised - a draft version was published in May 2014, but the final version is not expected to be published until after the general election. The final version of the Power to Amend Schemes regulations can be found by clicking here, and the DWP's response to consultation can be found by clicking here. > Back to Top Abolition of DB contracting out - reminder: GMP reconciliation Trustees and administrators whose defined benefit schemes hold GMP data should register for the NISPI Scheme Reconciliation Service ("SRS"), which has been designed to enable schemes to reconcile their membership data against HMRC's records as part of the process of ending contracting-out.Registration for the SRS is currently taking place, and must be completed by April 2016 - however, as there is likely to be a backlog of records to be checked, trustees should consider taking action to register as soon as possible. Further details of the SRS can be found by clicking here, and an online request form can be accessed. > Back to Top Abolition of DB contracting out - Countdown Bulletin No. 7 published HMRC has published a further bulletin on the steps required to prepare for the abolition of DB contracting-out, which can be found by clicking here. > Back to Top Abolition of DB contracting out - PMI News article published Tom McNaughton, a Senior Associate in the Pensions Department, has written an article for PMI News entitled: "Abolition of DB contracting-out - possible headaches for industry-wide schemes". The article, which first appeared in the March 2015 edition of PMI News, and is published with the permission of the Pensions Management Institute, considers the technical issues which may need to be considered by employers and trustees in the run-up to April 2016 and the end of DB contracting-out. The full article can be read here. > Back to Top FCA publish letter for CEOs regarding requirement to establish published As noted in our February 2015 Update, from 6 April 2015 the providers of workplace personal pension and stakeholder schemes (including auto-enrolment vehicles) will be required to have an Independent Governance Committee ("IGC") in place.As part of the implementation of this requirement, the Financial Conduct Authority have published a letter to the CEOs of insurance companies and other providers which provide such schemes, setting out the responsibilities of companies to put IGCs in place, and directing the CEO to the final rules for IGCs. A copy of the FCA's letter can be found by clicking here. > Back to Top DWP consults on proposed changes to the Investment Regulations As reported in our July 2014 Update, the Law Commission published guidance for pension scheme trustees when setting investment strategy.It also recommended a review of the relevant legislation to ensure it supports trustees in understanding and discharging their duties in this area.The Department for Work and Pensions ("DWP") has now published a consultation paper seeking views on two specific changes to the Occupational Pension Schemes (Investment) Regulations 2005.The first relates to the requirement to include a reference in the statement of investment principles to "social, environmental or ethical considerations".It is proposed that this requirement is amended so that it more clearly reflects the distinction between financial and non-financial factors.The second is a proposed new requirement to include in the statement of investment principles the trustees' policy on stewardship. The consultation will run until 24 April 2015, and the consultation paper can be found by clicking here. The Law Commission's guidance on investment strategy can be viewed here. > Back to Top Consultation on DC Governance and Charges - lastminute changes to secondary legislation As noted in our February 2015 update, the DWP had published its response to its consultation on proposals for improving the governance and regulation of DC pensions, and additional governance requirements for "master trusts" which extend to non-associated or industry-wide multi-employer schemes.Draft regulations, the Occupational Pension Schemes (Charges and Governance) Regulations 2015, were also published on 4 February. The DWP has now launched a further consultation on some technical amendments to the draft regulations, which are designed to ensure that no investment arrangement which solely receives additional voluntary contributions (AVCs) will be treated as a "default arrangement" and so made subject to the cap on charges (this could otherwise occur where money purchase AVCs were made to certain separate arrangements within a scheme which is a qualifying scheme for automatic enrolment purposes). The consultation document can be found by clicking here. > Back to Top Clarification of the PPF Levy Determination announced As noted in our January 2015 Update, the Pension Protection Fund (PPF) had published the final form of its 2015/2016 Levy Determination and other final form documentation.The PPF has now announced minor changes to the Determination to make clear the PPF's intention that consolidated accounts will be taken into account, where appropriate. The changes also clarify how Experian use Companies House indicators to categorise entities' accounts, but does not make any change to Experian's existing practice. Further details of the clarifications, and a marked up version of the Determination, can be found by clicking here. > Back to Top Extension of EMIR exemption from clearing for pension schemes Our Derivatives practice has published a client alert on the European Commission's recommendation to extend the pensions exemption from the Clearing Obligation under EMIR.This can be viewed by clicking here. This will be of relevance to large pension schemes whose strategy involves investing in over-the-counter derivatives. In particular, certain highly liquid interest rate swaps which will be the first over-the-counter derivatives to become subject to the Clearing Obligation. > Back to Top Baker & McKenzie International is a Swiss Verein with member law firms around the world. 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